Chevron – two-year window to extend LNG boom

Massive investment in LNG is coming to the rescue of Australia’s economy as the heat comes out of the mining boom, but Chevron’s local boss Roy Krzywosinski says the country must address its cost base if it wishes to secure future investment.
Photo: David Mariuz

Australia’s largest foreign investor has warned the future multibillion-dollar expansions of two huge liquefied natural gas projects in Western Australia hinge on bringing about a “structural change" to Australia’s cost base.

In contrast to Prime Minister Kevin Rudd’s claim that the resources boom is over, Roy Krzywosinski, the local head of Chevron, said Australia had only a two-year window to get policy settings right or risk missing out to overseas rivals for up to $150 billion of pending LNG investment that could ­significantly prolong the boom.

At stake is a decision to start design work on an expansion of Chevron’s $52 billion Gorgon LNG project, which was already delayed from last year after a 40 per cent blowout in the US dollar cost of the initial project. The US energy giant also has ambitions for a later expansion of the $29 billion ­Wheatstone LNG venture.

“All the projects in our portfolio compete for capital," Mr Krzywosinski told The Australian Financial Review. “Irrespective of who forms the next ­government, securing future energy investment will require a recalibration of government policy."

Mr Krzywosinski’s plea to both sides of politics for urgent action to tackle costs, productivity and industrial ­relations issues is being echoed by Cath Tanna, chairman of BG Group in Australia, which is building a $US20.4 billion ($22.2 billion) LNG project in Queensland, and Santos chief executive David Knox.

“We need to set Australia up for enduring prosperity by ensuring we secure the next wave of investments," said Ms Tanna, who is also on the board of the Reserve Bank of Australia.

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“A steady hand on the helm here is hugely important for making sure that we all have confidence that we can model projects well, we understand what the fiscal arrangements are, we know we can get the projects approved because we understand the regulation," Mr Knox said.

“All of this is really important in setting the whole tone to allow Australia to move forward with the next wave of investment."

Industrial relations balance call

Mr Krzywosinski pointed to a raft of policy chances that have confronted the industry in recent years, including changes to thin capitalisation rules, the carbon tax, limits to the deductibility of exploration expenditure, and new offshore visa laws that subject foreign-flagged vessels working offshore to the Australian workplace regime.

He called for “balance" to be returned to the industrial relations system, and for efforts from all sides to improve productivity.

Of concern is the expiry of labour agreements mid-way through the construction of projects, leaving proponents hostage to demands.

“Major capital projects are built on these agreements and having to change them midway through construction brings uncertainty and hastens the ratcheting-up of unsustainable wage increases," he said.

Massive investment in LNG is coming to the rescue of Australia’s economy as the heat comes out of the mining boom, with existing and committed projects set to contribute $520 billion to GDP in 2015-25, according to McKinsey.

Export earnings from LNG are set to surge more than fivefold to $61 billion by 2017-18, rivalling the contribution from coal and only just trailing iron ore.

Still on the drawing board are projects that could add a further $320 billion to GDP and create 150,000 jobs, flying in the face of Prime Minister Kevin Rudd’s stance that the mining boom is at an end.

Australia most costly

But after the unprecedented rush of LNG investment in the past four years, Australia has become the most costly place worldwide for new plants, while new competition is emerging in North America and east Africa.

Shell, which has slowed its $20 billion-plus Arrow LNG project in Queensland, said construction costs in Australia are now up to 30 per cent higher than in the US and Canada.

Mr Krzywosinski said LNG projects are “long-term projects that transcend governments" and Chevron would work with all sides of politics to get policy settings right.

Mr Knox said his biggest concern was the overlap of regulation between state and federal governments, as highlighted by the recent introduction of a “water trigger" in federal environmental legislation.

“We expect to be held to account but what really hurts us is when we have to apply to the states for one set of environmental approvals for example and then we have to go to the federal government for exactly the same set of environmental approvals," Mr Knox said.

Hanging in the balance for Santos is a potential $10 billion-plus investment with partner GDF Suez in the Bonaparte floating LNG venture; a decision to start design work is due early next year. Also at a critical stage are Santos’s ambitions for coal seam gas in NSW.